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THE OIL SCENE will never be the same again with the scrapping of the administered pricing mechanism, the disinvestment of oil PSUs, and the `deregulation' of private refining companies (that is, freeing their entry into the lucrative product refining sphere). It will be a somewhat uncertain future for the oil economy, with pricing, production-mix, and exports all undergoing a fundamental change. Oil being a crucial sector for any economy, it is imperative that the new arrangement succeeds, especially as confusion still surrounds such critical issues as the precise regulatory role of the Government and the extent of competition that will be allowed in the sector which not only has mega-companies but is also being opened up for disinvestment.

Take for example, the regulatory functions which, under the APM, were performed by the Oil Coordination Committee. Now the `market pricing' system has been introduced which should, theoretically at least, allow the oil companies to fix prices. But the implementation of the new mechanism indicates a wide gap between theory and practice which, though expected, could prove disastrous for the reform initiative unless narrowed to an acceptable, practicable level. Thus, while oil companies see an urgent need to "(reorient) ourselves to a free market situation" — that is, from "an assured 12 per cent return on assets to a very volatile market where there are no fixed marketing margins" — the Government says it would continue laying down policies for the downstream sector "keeping in view the objectives of oil security and the interests of the consumer". Thus, though in the past two months crude prices have been on the roll, oil companies have not raised prices (despite the losses when crude price shot up to $27 a barrel in early April) perhaps in deference to the wishes of the Government which wanted oil companies to hold the price line "at least till June to save consumers from wide fluctuations after decontrol". Admittedly, there is no simple solution to the pricing problem in view of the dependence on the international crude whose price is never stable for long, and the requirement that the consumer is not subjected to price variations, sharp or otherwise. The oil companies are trying to best match their variable crude costs with the requirement of price stability, while the Government tries to ascertain how the excise duty can be varied to cushion the impact on the consumer. The Finance Ministry's reluctance to excise duty cuts, if import prices increase, is easy to comprehend in view of the petroleum sector's role in revenue collection (borne out also by experience at the State level vis-à-vis sales tax movements).

Amongthe important tasks for the authorities is finding adequate space for private oil companies effectively to compete with the PSU giants without disturbing the basic operating principle of a level playing field, the overarching assumption being that an efficient oil industry will stand the average consumer in good stead. But perhaps the most difficult problem will be stepping up domestic crude output, stuck at 29-32 million tonnes per annum for decades. Not surprisingly, crude and product imports have been rising steadily (from 57.5 million tonnes in 1997-98 to 85.1 million tonnes in 2001-02) making the oil sector even more import dependent. Among other things, this does not speak well of the nation's economic security — the Government's first priority, especially in troubled times.

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Uncertain oil economy

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